Warren Buffett is one of the world’s wealthiest people, considered to be the most successful investor of all time. Buffett, or the ‘Oracle of Omaha’ as he is sometimes known, has a preference for companies that have a definite competitive advantage and fat profit margins. He also likes businesses that are well-managed and have a track record of creating value for shareholders.
I think one UK business that ticks all his boxes is outsourcing group Bunzl (LSE: BNZL).
Bigger is better
Bunzl is not a particularly unique business, but its size gives it a robust competitive advantage over the rest of the outsourcing industry. Outsourcing tends to be a relatively low-margin business because the market is so competitive. However, Bunzl’s scale and operating efficiencies mean it commands industry-leading profit margins.
For 2018, the company reported an operating profit margin of 5.3%, more than triple the industry average. Its return on capital employed (ROCE) — a measure of profitability for every £1 invested in a business — was 13.2% for 2018, compared to the market average of 3.7%.
These numbers tell us Bunzl is a highly profitable business with a robust competitive advantage, two of the hallmarks Buffett usually looks for when analysing any enterprise.
The group also has a good track record of creating value for shareholders. For the past decade, management has been successfully rolling cash generated from operations back into the business, growing sales and profits. Net profit has grown at a compound annual rate of 9.6% over the past six years. Book value per share has grown at 12.3% over the same time. The dividend has also grown in line with profitability, rising at a compound annual rate at 9% since 2013.
All of the above leads me to conclude Buffett might be interested in buying Bunzl today.
One of a kind
Another FTSE 100 stock that I think he might be interested in is Spirax-Sarco Engineering (LSE: SPX). This company reminds me of a recent Buffett acquisition, Precision Castparts. What he likes about the latter is its strong reputation for quality with customers. Spirax has earned a similar reputation over the past six decades, and this shows in the firm’s profitability metrics.
Once again, industrial engineering tends to be a low margin business, but Spirax’s operating profit margin of 25% last year is testament to the group’s reputation. Customers are willing to pay more for quality. ROCE hit 23% last year.
Unfortunately, the market is well aware of Spirax’s profitability and, as a result, the stock isn’t cheap. It’s currently dealing at a forward P/E 28.
However, Buffett has shown he’s willing to pay up for quality in the past. He paid around 20 times earnings for Precision Castparts, which suggests to me a P/E of 28 might not be too much of a stretch for such a profitable business with its established reputation.
A dividend yield of 1.4% only adds to the attraction, in my opinion, especially because the distribution has increased by nearly 100% over the past six years.
